ECONOMIC AND SOCIAL RESEARCH FOUNDATION (ESRF)
TANZANIA INVESTMENT POLICY AND PERFOMANCE
(REPORT A –FINAL)
by
Dr. Flora Musonda
And
Ms. Lorah Madete
22 July 2002
Paper Prepared for CUTS Centre for International Trade Environment and Economics-Investment for Development (IFD) Project
1
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Tanzania: National Investment Policy and Performance
TABLE OF CONTENTS
LIST OF ABBREVIATIONS......
1.0Introduction......
2.0MACROECONOMIC OVERVIEW......
2.1Macroeconomic Performance for the Past Decade......
2.2Infrastructure......
2.2.1Transport......
2.2.2Communications......
2.2.3Power Sector......
2.2.4Water......
2.3Technology and Skill Level......
2.3.1 Technology Level......
2.3.2Skills......
2.4Investment Flows......
2.4.1Domestic Investment......
2.4.2Foreign Investment......
3.0MAIn Policy trends over the past decade......
3.1National Development Strategy......
3.1.1Growth Promotion and Poverty Reduction Efforts......
3.2Trade Policy......
3.2.1The Tariff Regime......
3.2.2Regional and International Trade Arrangements......
3.2.3WTO Membership......
3.3Capital Controls......
3.4Privatisation Regulation......
3.4.1Privatisation Objectives and Policy......
3.4.2Parastatal Reform Process and Methods......
3.5Competition Law......
3.5.1The Legislation and Institutional Framework......
3.5.2Application......
3.6Labour Regulations......
3.7Environmental Regulation......
3.8Fiscal Regime Facing Investors......
3.9Intellectual Property Rights Regime......
3.9.1The Legal and Institutional Framework......
3.9.2Institutional Framework......
3.9.3International Agreements......
3.9.4Enforcement of Property Right Laws......
4.0INVESTMENT policy Audit......
4.1Background......
4.2Investing in Tanzania......
4.2.1The Registration Process......
4.2.2Investment Incentives......
4.2.3Dispute Settlement......
4.3Bilateral/Regional Agreements on Investments......
4.3.1Bilateral Investment Treaties......
4.3.2Bilateral investment Treaties for Avoidance of Double Taxation (DTT)......
5.0Policy making Process for INVESTMENT Issues......
5.1National Policy Objectives for Investment......
5.2Policy Formulation Process......
5.3Independence of Sub-National Layers in of Government in Dealing with Investment Issues
5.4Importance Accorded to Investment......
6.0INVESTMENTs In ZAnzibar......
6.1Background......
6.2Investment Patterns......
6.2.1Sectoral Distribution......
6.2.2Spatial Distribution......
6.2.3Source Countries......
6.2.4Institutional Framework......
6.2.5The Registration Process......
6.2.6Investment Incentives......
6.3Impact of FDI in Zanzibar......
6.3.1Employment Opportunities......
6.3.2Transfer of Technology and Technical Know How......
7.0CONCLUSIONS......
REFERENCES......
Annexes
Annex I:......
Annex II:......
Annex III:......
Annex VI.
LIST OF ABBREVIATIONS
AD-Arusha Declaration
ARIPO-Africa Regional Industrial Property Registration Organisation (ARIPO)
ATC-Air Tanzania Cooperation
ATE-Association of Tanzania Employers
BoT-Bank of Tanzania
BRELA-Business Registration and Licensing Agency
CBI-Cross Boarder Initiative
CDTT-Centre for Development and Transfer of Technology
COSTECH-The Commission for Science and Technology
DPS-Deputy Permanent Secretary
DRC-Democratic Republic of Congo
DSE-Dar es Salaam Stock Exchange
EAC-East African Community
EADB-East African Development Bank
EIA-Environmental Impact Assessment
ERP-The Economic Recovery Program
ESAP-Economic and Social Action Programme
ESRF-Economic and Social Research Foundation
EU-European Union
EWURA-Energy and Water Regulatory Authority Act
FDI-Foreign Direct Investment
GATS-General Agreement on Trade in Services
GATT-General Agreement Tariff Trade
GDP-Gross Domestic Product
GFCF-Gross Fixed Capital Formation
HDI-Human Development Index
HIPC-Highly Indebted Poor Countries
ICSID-International Center for Settlement Disputes
ICT-Information and Communication Technology
IFTD-Integrated Framework for Trade and Development
IMF-International Monetary Fund
IMTC-Inter -Ministerial Technical Committee
IOR-ARC-Indian Ocean Rim Association for Regional Cooperation
IPC-Investment Promotion Centre
IPR-Intellectual Property Right
IPTL-Independent Power Tanzania Ltd
ISD-Insurance Supervision Department
ISPs-Internet Service Providers
LART-Loans Advances and Realisation Trust
MEBO-Management/Employment Buy Out
MHSTE-Ministry of Science, Technology and Higher Education
MIGA-Multilateral Investment Guarantee Agency
MTEF-Medium Term Expenditure Framework
MTS-Multilateral Trading System
NISC-National Investment Steering Committee
NBS-National Bureau of Statistics
NDC- National Development Corporation
NEAP-National Environmental Action Plan
NEMC-National Environmental Management Council
NEP-National Environmental Policy
NESP-National Economic Survival Program
NGO-Non Governmental Organization
NPES-National Poverty Eradication Strategy
NSTP-National Science and Technology Policy
OFL-Own Funds Facility
OGL-Open General License
PER-Public Expenditure Review
PPP-Purchasing Power Parity
PRSP-Poverty Reduction Strategy Paper
PSRC-Parastatal Sector Reform Commission
RBPS-Restrictive Business Practices
RPFB-Rolling Plan and Forward Budget.
SADC-Southern African Development Community
SAP-Structural Adjustment Programme
SUA-Sokoine University of Agriculture
SUMATRA-Surface and Maritime Regulatory Authority Act
TANESCO-Tanzania Electrical Supply Company Ltd
TAZARA-Tanzania Zambia Railways Authority
TBC-Tanzania Broadcasting Commission
TCC-Tanzania Communications Commission
TFTU-Tanzania Federation of Trade Unions
THA-Tanzania Harbours Authority
TIC-Tanzania Investment Centre
TIN -Tax Identification Number
TPTC-Tanzania Posts and Telecommunication Corporation
TPC-Tanzania Posts Cooperation
TRA-Tanzania Revenue Authority
TRC-Tanzania Railway Cooperation
TRIPS-Trade Related Aspects of Intellectual Poverty Rights
TTCL-Tanzania Telecommunications Company Ltd
TUCTA-Trade Unions Congress of Tanzania
UK-United Kingdom
UNDP-United National Development Program
URT -United Republic of Tanzania
USD-United States Dollar
VAT-Value Added Tax
VP-Vice President
WTO-World Trade Organization
WIPO-World Intellectual Property Organisation
ZAFREZA-Zanzibar Free Zone Authority
ZFA -Zanzibar Free Zone Authority
ZIPA-Zanzibar Investment Promotion Agency
1
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Tanzania: National Investment Policy and Performance
1.0Introduction
Tanzania, independent since 1961, had an estimated GDP per capita of US$ 270 in 2000 (IMF[1]) or US$ 501 if purchasing power parity (PPP) rate is used. It has a Human Development Index (HDI) of 140 making it the 23rd poorest country out of 174 in the world (UNDP, 2001). Tanzania is heavily dependent on agriculture, which is estimated to contribute about 48 and 65 percent of GDP and export earnings respectively (URT 2001). The manufacturing sector is small currently accounting for 7.5 percent of GDP. Upcoming contributors to the economy are mining and tourism sectors, the former of which has shown the highest growth rate in three consecutive years between 1998 and 2000 (URT, 2001).
Significant post independence efforts to promote private investment in Tanzania can be traced from the late 1980s when the role of local and foreign private investment activities in the development process of the country gained recognition and importance. Slightly more than a decade since these concerted efforts began, it is worthwhile to take stock of Tanzania’s position in terms of its viability as an attractive location for both domestic and foreign private investors. The subsequent sections of this document proceed to give a broad outline of the national investment regime and an assessment of the developments in investment and investment related policies that Tanzania has pursued in the last decade.
2.0MACROECONOMIC OVERVIEW
2.1Macroeconomic Performance for the Past Decade
Growth in the 1990s improved compared with the 1970s and 1980s, mainly driven by successful macroeconomic and structural reforms, starting with the National Economic Survival Program (NESP) (1980-82) and the Structural Adjustment Program (SAP) (1982-85). The former aimed at improving economic growth by, among others, increasing foreign exchange reserves that had dwindled to very low levels while the SAP undertaken between 1982 and 1985 implemented a number of reforms including partial liberalisation of producer prices, devaluation of the Tanzanian shilling and reduction in government expenditure. Even with this second phase of internally initiated reforms, Tanzania still faced macroeconomic imbalances such as high fiscal deficit, severe foreign exchange shortage and high inflation. These reforms were thus followed by World Bank/IMF instituted Economic Recovery Program (ERP) which also addressed the social dimensions of adjustment.
Subsequent to adoption of the SAPs, various sectoral and institutional reforms in the public, financial and trade sectors were initiated in late eighties and continued to be refined through out the 1990s. Public sector reforms involved reforms of the civil service and a massive restructuring and privatisation of the parastatal sector under the Parastatal Sector Reform Commission (PSRC) in which more than half of parastatals were removed from government control between 1994 and 1998. At the same time, financial and trade liberalisation was begun. By the end of the of the 1980s, all trade restrictions except for petroleum products and goods restricted for health and security reasons were abolished. Institutional reforms also had a profound effect on policymaking in the 1990s as well as performance of the economy, though the structure of the economy remained largely unchanged. Table 2.1 below contains selected indicators of this performance, brief explanations of which follow.
Table2.1:Trends in Selected Macro-economic Indicators
Indicators / Years1990 / 1991 / 1992 / 1993 / 1994 / 1995 / 1996 / 1997 / 1998 / 1999
Population (mill) / 23.9 / 24.6 / 25.3 / 26.0 / 26.7 / 27.5 / 28.3 / 29.1 / 30.0 / 31.1
GDP factor cost (mill USD) / 3,846 / 4,445 / 4,226 / 3,879 / 4,170 / 4,866 / 5,953 / 7,043 / 7,719 / 7,879
Real GDP growth (%) / 5 / 6 / 4 / 4 / 3 / 3.6 / 4.5 / 3.5 / 4.0 / 4.7
Per Capita Income (US$) (nominal) / 160.9 / 180.7 / 167.0 / 149.2 / 156.2 / 176.9 / 210.3 / 235.6 / 257.0 / 270.0
Per Capita real GDP growth (%) / 2.2 / 3.2 / 1.2 / 1.2 / 0.2 / 0.8 / 1.7 / 0.7 / 1.2 / 2.0
Inflation Rate (%) ++ / 32 / 34 / 24 / 24 / 27 / 27.4 / 21 / 16.1 / 12.8 / 7.9
Savings deposit rate, average (%) / 26 / 26 / 26 / 24 / 25 / 21.1 / 16.7 / 15.1 / 7.0 / 8
Lending rate average (%) / 26.0 / 26.0 / 30.0 / 30.0 / 31.5 / 35.5 / 33.5 / 26.5 / 26.0 / 22
Public Gross Fixed Capital Formation/GDP (%) / 11.4 / 9.7 / 9.9 / 8.0 / 6.5 / 3.6 / 3.8 / 3.2 / 3.6 / 3.3
Private Gross Fixed Capital Formation/GDP (%) / 16.7 / 18.9 / 19.1 / 18.6 / 20.0 / 17.6 / 14.2 / 12.9 / 13.8 / 13.2
Private Gross Fixed Capital Formation/Total (%) / 59.4 / 66.1 / 65.9 / 69.8 / 75.6 / 82.8 / 78.9 / 80.1 / 79.2 / 79.8
Gross Domestic Savings/GDP (%) / -0.6 / -0.6 / -2.4 / -3.1 / -1.2 / 0.8 / 5.4 / 6.2 / 6.0 / 2.2
External Debt Service (%)** / - / - / - / - / - / 44.1 / 40.8 / 36.4 / 40.2 / 27.9
Debt Service as % of Exports*** / 33.0 / - / - / - / - / 16.5 / 17.3 / 17.5 / 16.2 / 17.4
Foreign Direct Investment Flows US$ Mill. / 0.0 / 0.0 / 12.0 / 20.0 / 50.0 / 150.0 / 148.5 / 157.8 / 172.2 / 183.8
Services as % of Total Exports / 43.8 / 29.3 / 29.7 / 41.4 / 44.6 / 46.1 / 41.3 / 39.6 / 47.7 / 54.2
Current Account Balance (US$ Mill) / -558.9 / -736.1 / -708.1 / -1022 / -711 / -646.4 / -461.2 / -555.1 / -946.6 / -862.0
Current Account Balance/GDP (%) / -13 / -15 / 16 / -21 / -14 / -11 / -6 / -6 / -9 / -7
FDI Inflow (US$ million) / -3.3 / 2.9 / 12 / 20 / 50 / 119.9 / 150.1 / 157 / 172 / 183
FDI Stock (US$ million) / 93 / 93 / 105 / 125 / 175 / 325 / 473 / 631 / 803 / 987
FDI Stock as % of GDP / 2.2 / 2 / 2.1 / 2.7 / 4.1 / 6.5 / 8.1 / 9 / 9.9 / 11.2
Foreign Reserves (Weeks of imports) / 6.8 / 8.2 / 12.4 / 6.0 / 9.5 / 6.6 / 11.3 / 16.5 / 13.4 / 18.0
Key:++Annual average. By Sept – end 2000 it had declined to 5.7% (from 5.8% in June 2000).
**As % of Government recurrent revenue. Reliable data available from 1995.
***As % of total exports for financial year, (where 1994 = 1993/94).
SourcesBOT (various), URT (2000) Economic Surveys and and UNCTAD Online data base[2] (12/06/2002)
2.1.1Market Size and Market Growth
Per capita GDP is still low, but the growth trend in this decade has been encouraging. After a decline of per capita income in real terms at the rate of 2 percent per annum during the crisis period, it averaged at 1.2 percent between 1997 and 2000. It is acknowledged that the growth rate is still too low to make a significant dent on poverty in the country. Achievement of higher growth and poverty reduction are key preoccupations of Tanzanian authorities having created an enabling environment for growth with efforts to increase investment both in physical and human capital as key strategies. Other strategies to expand the market include entering into regional integration agreements.
2.1.2Macro Stability
The rate of inflation also declined significantly in this period from 34 percent in 1991 to 9.1 percent in January 1999 (BoT, 1999). While stabilization efforts have been important, there have been concerns regarding the stringency of the recessionary approach to achieving it. Fiscal stability has been achieved at the expense of compressing public expenditure. Moreover, tight monetary policy has resulted in high real interest rates and a credit squeeze. The interest rate spread has widened considerably since the onset of liberalisation 19 percentage points in 1998. This phenomenon has acted as deterrent to savings mobilisation and the efficient channelling of resources. BoT (2000) attributes the rigidity in lending rates to structural impediments in the financial sector.
2.2Infrastructure
Underdeveloped infrastructure is often pointed out as one of the key constraints to exploiting Tanzania’s development potential. The infrastructure network needs to be upgraded to facilitate improved accessibility to productive locations. The following sections give an overview of the current state of the development infrastructure.
2.2.1Transport
The transport network in Tanzania is geared towards serving an economy dependent on the outside world for output markets and imported inputs. This has left major gaps in terms of creating a relatively more cohesive network that would have fostered the development of a domestic market. Statistics show that Tanzania has a road network consisting of only 85,00 kilometres (kms) of roads of which only about 5 percent of roads are paved (World Bank & URT, 2001; URT 2001). Currently, road transport in Tanzania has been dominated by private companies whose services are delivered on competitive terms.
The railway system covers about 3,570kms with two public companies managing and owning the lines. Railways connect the port of Dar es Salaam with neighbouring countries.
In air transport, there in one national carrier –Air Tanzania Corporation (ATC) that is currently in the process of being privatised and a number of private companies providing domestic and international air services. There are four main private companies that provide this service domestically and several international carriers cater for international routes.
2.2.2Communications
The communication systems in the country, especially the telephone system are fairly well developed. A number of bold institutional, legal and policy reform measures taken during the nineties to improve service provision in the sector paved way for this encouraging scenario. The reform and restructuring of the communications sector started with the separation of regulatory functions from operational activities on one hand and the separation of postal services from telecommunications operations on the other.
These reforms have been reinforced by the National Telecommunications Policy in 1997. In 2001, the Tanzania Communications Commission (TCC) was given more powers to efficiently manage the national frequency spectrums buttressed the reforms further. Tanzania has therefore shifted from state monopolised provision of main communication services to the current situation where the TCC has licensed 2 basic telecom operators, 5 cellular phone operators[3], 6 providers of public data communication services[4], 6 internet service providers (ISPs)[5] and 4 radio paging services providers[6]. Currently, telecom network in the country is over 95 percent digitalised and the country’s tele-density has been significantly improved to 1 telephone per 100 inhabitants from 0.3 per 100 people, which existed for many years mainly as a result of vibrant cellular phone services. The challenge that has to be addressed is to increase coverage across the country especially in the rural areas and this constrains accessibility to the telecom networks.
2.2.3Power Sector
The electricity supply system is mainly hydroelectric, with five hydro power plants[7] supplying 85 percent of the total electricity. The remainder of the supply is thermal. There are high prospects to switch from diesel based to gas based generation of electricity. For most part, power generation, supply and distribution is managed by a state run utility company –Tanzania Electrical Supply Company (TANESCO) Ltd[8].
As at the end of last year, Independent Power Tanzania Ltd (IPTL) became the first private company to generate electricity, following a protracted stand off it had with the government. However, they supply this electricity to TANESCO, which then supplies it to consumers through the national grid. Opportunities abound for private sector participation in the sector. Some of the expected gains include removal of the cost inefficiencies and low revenue collections, which are the main sources of high unit costs being lamented at by consumers.
2.2.4Water
Tanzania is well endowed with abundant water resources, however, harnessing of these resources for irrigation and other economic and social development activities has not reached satisfactory levels. Current water supply covers only 68 percent of urban centres and 46 percent of rural areas (URT/World Bank, 2001). Urban water authorities are therefore being restructured to facilitate private participation. Efforts are also underway to rehabilitate and expand water infrastructure in a number of major towns (URT, 2001). This augurs well for investment endeavours both in creating opportunities for profitable private investment and also for much needed improvement in water infrastructure, which in turn perks up the investment environment.
2.3Technology and Skill Level
2.3.1 Technology Level
Wangwe (1995) cited paucity of technological innovation, small output of scientific publications, low levels productivity in the almost all sectors of the economy and weak state of human resource development especially in scientific and technological fields as manifestations of low technological capability in the country. There is little evidence of any improvement in this situation. It is worth pointing out that Tanzania Investment Act has nullified the need for investors to make separate applications for transfer of technology (agreements, and requires that this agreement be registered with the Tanzania Investment Centre TIC) to be effected. It is not clear if there is any collaboration between the TIC and the technology agencies on critical policy issues concerning technology transfer, use of indigenous technical personnel or on the local production of parts and components for gradual replacement of imports. If the status quo remains the same, this is an anomaly that needs to be addressed.
2.3.2Skills
A number of studies (ESRF, 2002; UNCTAD, 2001; World Bank, 2001; Wangwe, 1995) document skill inadequacies and shortages among the Tanzanian populace especially those required to cope with the challenges of and ensuring that benefits of rapid technological advances and the move towards market oriented economy are harnessed to the maximum. According to World Bank/URT 2001, only 67 percent of the labour force estimated at 25 million is functionally literate, 32.1 percent never had any formal education 21.4 percent went to primary school but did not finish, while 43.1 percent have finished primary education and only 3.2 percent went to secondary school and above. Skill shortages are apparent in managerial and technical areas-manifested by the significant amounts of their outsourcing of (especially the former) from the neighbouring country of Kenya and other countries. That this is happening amidst a situation where a number of graduates are facing difficulty in finding jobs where they can apply their training or any jobs at all, puts into question the relevancy of the curriculum to demands of the emerging private sector dominated economy.
Three key issues impinge on the skill and competencies of the Tanzania’s human resource.
- Weakness in terms of the structure, access, relevancy and adequacy of the education system. Availability and affordability of education need to be improved especially at the post primary level where it has not been able to keep pace with neither the expansion of the population nor the demands of the modernising economy.
- Brain drain. In search of higher benefits a significant number of highly trained personnel have left the country and gone to southern African countries especially Namibia and Botswana. Some have migrated to other eastern African Countries and some to even outside Africa. Indicative data from higher education institutions demonstrates large numbers of highly qualified staff leave the country.
- AIDS/HIV pandemic. This threatens to erode gains that have so far been made in human development for the past four decades. The rate of HIV infection is estimated to have reached 8.1 percent in Tanzania (URT/World Bank, 2001) and is fast moving from being a purely health problem to an economical and social concern.
2.4Investment Flows
With gross fixed capital formation at 20 percent of GDP investment effort in Tanzania is still too low to foster meaningful economic and social development in the country. During the 1990s, the share of capital formation in GDP declined from a peak of about 30 percent in 1991 to only 18 percent in 1997. The decline in investment after 1992 reflects mainly the fall in public investment as a result of cutting down overall government expenditure, which was not matched by an adequate response in private sector investment despite the reforms. There has been a mixed performance pointing towards an increased trend since 1998.